TaxTMI 
TaxTMI 
2016 (5) TMI 58
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....ase was processed under section 143(1) of the Act and subsequently, the same was selected for scrutiny. During the course of hearing, the Assessing Officer noticed certain facts and based on that, a show-cause notice along with questionnaire under section 142(1) dated July 8, 2010, was issued. The assessee filed the reply to the said notice. After considering the reply of the assessee, the Assessing Officer found certain claims of the assessee not tenable. 5. Out of those certain claims, one of the issues is against the addition of Rs. 1,03,12,934 under section 2(22)(e) of the Act, which is the dispute in the present appeal. The facts relating to this issue are as follows. 6. The Assessing Officer vide show-cause notice dated December 9, 2010, asked the assessee to explain as to why loan of Rs. 1,03,12,934 taken from M/s. Sindhu Trade Links Ltd. (hereinafter "STLL") be not treated as deemed dividend in view of the facts that directors of the assessee- company are substantially interested in the said companies and also some of the shareholders are common in both the companies. In response, the assessee furnished the facts stating that section 2(22)(e) is not applicable to the ....
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....n per cent. of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits ; (ii) Although the STLL has claimed that the equity shares of the company is listed on Delhi Stock Exchange and Jaipur Stock Exchange, but in para 13 of the director's report itself, it has also been mentioned that these shares were not traded during the year under review. (iii) As per para 5 of the director's report, the company has not invited or excepted any public deposit within the meaning of sections 58A and 58AA of the Companies Act, 1956 and section 45-I(bb) of the Reserve Bank of India Act, 1934, during the year under review. The company does not hold any public deposit as on date and will not accept the same in future without the prior approval of the Reserve Bank of India in writing. (iv) The authorised representative vide letter dated December 13, 2010, ha....
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.... substantially interested, rather it was a company which was closely held by the promoter Mr. Sindhu and his family members and therefore the saving clause (ii) of section 2(22) of the Act would not be applicable and come to the rescue of the assessee-company insofar as invoking section 2(22)(e) was concerned. According to the Assessing Officer, the onus was on the assessee to prove that STLL was a widely held public limited company in which the public were substantially interested and the onus was also on the assessee-company that the shares of the STLL were widely traded and its shares were available in the open market for purchase and sale by any common man/person and held that the assessee failed to discharge its onus and the Assessing Officer countered the submissions of the assessee that the STLL was an NBFC and therefore the deeming provision of section 2(22)(e) would not be applicable by giving the following reasons : "The Income-tax Act provides certain exceptions with respect to the provision of deemed dividend. This has been laid down in saving clause (ii) of section 2(22) of the Income-tax Act, which has been reproduced herewith- but 'dividend'....
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....in this case. b. The appellant has submitted extensive arguments on this issue. Again, the crucial issue is found to be whether the lender companies are ones in which the public are substantially interested. Section 2(22)(e) : Not applicable to widely held companies : Section 2(22)(e) uses the words : any payment by a company 'not being a company in which the public are substantially interested' meaning thereby that section is applicable only to companies which are commonly known as closely held companies. Section 2(18) of the Act reads as under : '(18) "company in which the public are substantially interested"-A company is said to be a company in which the public are substantially interested- (b) if it is a company which is not a private company as defined in the Companies Act, 1956 (1 of 1956), and the conditions specified either in item (A) or in item (B) are fulfilled, namely : (A) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) were, as on the last day of the relevant previous year, listed in a recognised sto....
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....STLL and in this scenario, it could not be accepted that the STLL was a public company where public was substantially interested. He further submitted that the percentage of shares of other directors and their family members would again go on to prove that it was not a company in which public are substantially interested, rather it was a company which was closely held by the promoter Mr. Sindhu and his family members and therefore the saving clause (ii) of section 2(22) of the Act would not be applicable and come to the rescue of the assessee- company insofar as invoking section 2(22)(e) was concerned. The learned Departmental representative submitted that the assessee failed to prove the onus that STLL was a widely held public limited company in which the public were substantially interested and that the shares of the STLL were widely traded and its shares were available in the open market for purchase and sale by any common man/person. He also submitted that the assessee has failed to prove that the STLL was an NBFC, therefore, the deeming provision of section 2(22)(e) would be applicable. He, therefore, submitted that the loans are nothing but deemed dividend and is liable to be....
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....ay of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent. of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (here after in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits ; But 'dividend' does not include- (ii) any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where the lending of money is a substantial part of the business of the company ; The assessee-company submitted the interpretation of the section point-wise vis-a-vis observation of the learned Assessing Officer as follows : 1. Section 2(22)(e) : Shareholding conditions not applicable Section 2(22)(e) of the Income-tax Act, 1961, is attracted when a shareholder having sh....
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....gulation) Act, 1956 (42 of 1956), and any rules made thereunder ; It was submitted before the learned Assessing Officer that STLL is public limited company through following evidences which have been discussed by the learned Assessing Officer at pages 10 to 13 in the assessment order : (a) Listing evidences of being listed on Delhi Stock Exchange and Jaipur Stock Exchange. (b) Shareholding pattern as on March 31, 2008, of the assessee- company. Stand taken by the learned Assessing Officer : a. The learned Assessing Officer has observed on page 10-paras (ii) and (iii) that for STLL, in the director's report, it has been stated that shares were not traded during the year and also further stated that company has not accepted the public deposits. b. The learned Assessing Officer observed at page 11 that STLL has claimed that it is a listed company but no evidence has been provided regarding that it continues to be listed at stock exchanges and has not been suspended or de-listed. c. The learned Assessing Officer observed at page 13 that nearly 59 per cent. shareholding is controlled by its directors, family members. ....
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...., 2008 have been placed on record. The same is available in public domain on the websites of NSE and BSE. The assessee-company submitted that from the shareholding pattern of these companies, it can be seen that promoter shareholding for these companies is much more that what is for the assessee- company. Somewhere it is hovering around 88 per cent. Still they are regarded as listed and widely held companies. So the same parameter shall be used for assessee-company also. Further as per Securities Contracts (Regulation) Rules, 1957, rule 19(2)(b) provides following with respect to public shareholding for a listed company : '19. Requirements with respect to the listing of securities on a recognised stock exchange. (2) Apart from complying with such other terms and conditions as may be laid down by a recognised stock exchange, an applicant company shall satisfy the stock exchange that : (b) At least 10 per cent. of each class or kind of securities issued by a company was offered to the public for subscription through advertisement in newspapers for a period not less than two days and that applications received in pursuance of such offer....
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....ce-sheet and profit and loss account are enclosed herewith) shows that STLL has earned following income out of NBFC activities : Particulars Sindhu Trade Links Ltd. (Rs.) Interest income 3,25,32,082.00 Loan syndication charges 71,29,302.23 Hypothecation charges 15,62,631.81 Bad debts recovered 16,13,303.00 Miscellaneous receipts in nature of processing fee etc. 16,47,815.06 Total 4,44,85,134.10 The above details shows that STLL is perusing NBFC activities and inter corporate deposit has also been advanced in the ordinary course of activities." 14. We have heard both sides and perused the material on record. The only dispute is whether the lender companies which has made deposits (inter corporate deposits (ICD)) will fall under the deeming provision under section 2(22)(e) of the Act or not. We find that section 2(22)(e) excludes public company "not being a company in which the public are substantially interested". Section 2(18) of the Act defines companies in which the public are substantially interested. As per the said definition, a company is said to be a company in which the public are substantially interested, if it is a com....
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....t and loss account of Rs. 16,15,903 in view of the fact that the assessee has given share application money of Rs. 9.86 crores which is not earning any interest income and the assessee has no surplus funds without appreciating that the assessee-company is available with interest-free shareholder funds of Rs. 34.46 crores. 18. The Assessing Officer observed that as per the Schedule "E" of the balance-sheet which refers for current assets, loans and advances, the assessee had shown an amount of Rs. 14,03,24,434. According to the Assessing Officer, a perusal of the bifurcation of this amount showed that the assessee had given advance of Rs. 9,86,87,800 in the garb of share application money to various entities. He asked the assessee to provide details of the same and to confirm whether shares had been allotted in its name or not and he further show caused as to in the case of non-allotment of such shares why not an appropriate rate of interest be charged thereupon in view of the facts that it is bearing an interest burden of Rs. 16,15,903 apart from bank charges of Rs. 47,906. He further observed that the assessee had made a veiled attempt to show that it was not bearing any intere....
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....den due to the amount paid as share application money because the fact remained that the appellant had borrowed interest bearing loans and had debited Rs. 16,15,903 in the profit and loss account. Accordingly, the Assessing Officer ordered to disallow the interest debited to the profit and loss account and made an addition of Rs. 16,15,903 to the income of the assessee. 19. Aggrieved, the assessee went in appeal before the learned Commissioner of Income-tax (Appeals) who confirmed the action of the Assessing Officer on this issue. 20. The learned authorised representative reiterated the submissions made before the learned Commissioner of Income-tax (Appeals) and the relevant submissions made are reproduced below for the sake of clarity : "The assessee-company submitted that the learned Assessing Officer has made the following allegations : Allegation No. 1 : The assessee-company has failed to discharge its onus that advances were in ordinary course of business of the assessee- company. (page 3 of the assessment order) Reply to allegation : Being private limited company, there is no bar on to it that it cannot give advances in the f....
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....ant-company is ? It is a decision which is normally entrusted by the shareholders of the company to its faithful management who take the decisions depending upon the financial needs, aspirations, goals or objects set for the company. Nobody can dictate terms to a appellant as to how to conduct the affairs. Allegation No. 4 Another allegation made by the learned AD was that since the assessee-company has borrowed interest bearing loans and has debited interest amount of Rs. 16,15,903 to the profit and loss account, this fact in itself is a testimony that the assessee-company had no surplus fund in so far as to advance non-interest bearing funds to other companies. Reply to the allegation The shareholder fund position as furnished above evidence the fact that the appellant-company was available with more than sufficient free funds for use at its own discretion. Reliance is placed on CIT v. Hotel Savera [1999] 239 ITR 795 (Mad), wherein the hon'ble Madras High Court has held that once it is established that the assessee-company is having sufficient free funds, presumption would always be made that advances to third parties have been mad....
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....ed to yield interest at 18 per cent. per annum which works out to Rs. 1,77,63,804. However, since the assessee is bearing interest burden of Rs. 16,15,903 only he made the disallowance only to that extent. He also noted that the fact that the assessee had taken interest bearing loans shows that the assessee does not have any surplus funds. During the appellate proceedings, the assessee's claim that it had sufficient surplus fund which is to the tune of Rs. 34.46 crores and the amount of share application money/advances paid is only Rs. 9.86 crores that works out to 28.63 per cent. of the total shareholder funds has not been taken into consideration by the learned Commissioner of Income-tax (Appeals) who has confirmed the disallowance by merely stating that till date, the shares have not been allotted to the assessee-company where the share application money has been invested as claimed by the assessee. According to the learned Commissioner of Income-tax (Appeals), the assessee has not taken any steps to get back this amount which has been invested in the assessment years 2007-08 and 2008-09 and held that it was a blatant diversion of funds under the guise of share application m....